- GBP/USD looks to be breaking higher
- 'Sell America' trade back on
- UK inflation and PMIs on tap this week
Photo by: U.S. Department of State (IIP Bureau).
The British Pound is attempting to break higher, helped by fresh concerns over the U.S.
A period of remarkable consolidation might finally be ending for the Pound-to-Dollar exchange rate (GBP/USD), which starts the new week with a 0.75% gain.
The rise comes as investors sell U.S. assets, including the Dollar, amidst rising concerns that the U.S. is becoming too indebted at a time when foreign investors are turning cautious about America under the Trump administration's handling of tariffs and verbal attacks on the Federal Reserve.
The President's financial planning isn't enthusing investors either: The Republican Party is likely to pass its "mega bill" this week, which will deliver Trump's tax and spending objectives. With commitments to roll over tax breaks and with no intention to materially cut spending, the verdict in markets and among analysts is clear: U.S. debt will continue to balloon.
Recognising this is the ratings agency, Moody's, which on Friday cut its credit rating on the U.S. by one notch to Aa1 from Aaa, while its outlook was changed to stable from negative.
"Successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs," Moody's said.
Fitch and S&P, the other main agencies, had previously lowered the U.S.’s gold-plated rating.
"Can the U.S. Treasury market continue to absorb increased supply and apparent indifference to rising deficits by the Trump administration? Much of the cost of this bill is merely to extend the status quo and other aspects could easily be crowded out by yields being higher than otherwise would be. That in our view means this development will not prove positive for the dollar," says a note from MUFG Bank.
The thirty-year bond yield, a benchmark for long-dated debt, saw its yield rise to the psychologically significant 5.0% level on Monday, confirming investor concerns. Despite the rising yield, the Dollar fell. (Normally, rising yields = a strong USD. However, when the relationship breaks down, it signals that a risk premium in the USD is building.)
With markets resuming USD sales, the GBP/USD is pushing higher and potentially exiting a period of consolidation, which has given rise to expectations that it could retest the 2025 highs in the coming weeks.
Above: GBP/USD at daily intervals showing compressing price action and a potential breakout move underway.
Despite burgeoning debt, the Republicans are looking to pass a bill that will embed 2017's tax cuts, while offering little by way of meaningful spending cuts.
This means the U.S. debt burden is set to grow, and there are whispers that a market that is more sceptical about the U.S. in the Trump era might be less willing to fund this spending by buying U.S. debt (bonds).
"With less global trust comes less desire to finance the external position of other countries. I don’t want to overstate this relationship, but it could be a useful framework going forward if Liberation Day was the peak for the USD and global investors become more risk averse as it pertains to investing in countries that require a steady stream of external capital," says Brent Donnelly, trader and analyst at Spectra Markets.
Above: House Speaker Johnson (right) is to push through new spending plans that will grow the U.S. debt burden. DOD photo by U.S. Navy Petty Officer 1st Class Alexander Kubitza.
In terms of the domestic calendar, the GBP will be watching the midweek inflation release.
The market consensus forecast is that it surged 1.1% month-on-month in April, launching the annual rate far beyond the Bank of England's 2.0% target to 3.3%.
The Bank cut interest rates in early May, arguing that this surge in inflation is merely temporary and inflation will fall below target in the near future. But the market will be scouring the report's details for any signal that this evergreen optimism displayed by the Bank of England is unfounded and that the ingredients for embedded above-target inflation dynamics litter the finer details.
If elements of the report, such as services inflation, make for uncomfortable reading, then the higher-for-longer UK interest rate theme will remain intact, helping Pound Sterling extend recent gains.
However, any undershoot in the figures would likely prompt markets to bet that the Bank of England's optimism is well placed, and that they might soon signal they can accelerate the rate cutting process in the coming months.
This outcome would weigh on the Pound.
The Pound has shown a weak reaction function to domestic data of late, and it would take an eye-opening surprise to really get the FX market's juices flowing and deliver some nice moves in the Pound.
Perhaps PMI data for May, due out the following day, will be the bigger event.
After all, it is the market's go-to snapshot for immediate data that can tell us how an economy is responding to recent events.
These PMI data will help investors interrogate the UK's significant employment tax and minimum wage hikes of April, as well as the impact fading tariff fears have had on the economy. It will also cover any sentiment response to the UK-U.S. trade agreement.
The PMI survey also offers a leading indicator of inflation, and could answer some of those questions markets will be searching for in the official figures released a day prior. Also remember that employment dynamics and price setting intentions will offer insights into future inflationary developments.
Stepping away from the data calendar, the market is showing a preference to fade any knee-jerk responses to the releases, as highlighted by the lacklustre FX response to last week's official jobs report, deferring instead to the bigger picture that is the global backdrop.